Philip Morris International Inc.

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1 September 8, 2017 PM: Marlboro Prices Going Up In Japan Outperform/$140 Overweight Company Note PM Wins Approval to Raise Marlboro Retail Prices by 2.2% in Japan Effective October 1 - Should Be A Positive for Margins and Should Help To Accelerate Smoker Conversion to iqos - We just learned that Japan s Finance Ministry approved PM s application on 9/6 to increase retail pricing by 10/pack on Marlboro combustible cigs effective 10/1. This price increase is particularly notable because it will occur in absence of an increase in cig excise taxes a rare event. The price hike will effectively raise the retail price of a pack of Marlboro to 470 from 460 (+2.2% increase) while leaving the price of a 20-stick pack of iqos HeatSticks unchanged at 460 (and 10,000/kit). This compares to Mevius, which retails for 440/pack. The key implication, in our view, is this could further accelerate smoker conversion (namely Marlboro smokers) to iqos, while also helping to protect the profitability of the Marlboro brand family as combustible cig volumes continue their secular decline. For comparative purposes, BAT s glo product sells for 420/pack (Neostiks) and 8,000/kit and JT s Ploom Tech product sells for 460/pack (refills) and 4,000/kit. Bottom line We believe this is a positive development and could potentially enhance PM s net price realization target going forward (+6% for FY17) as well as drive even faster share gains for iqos in Japan (13.7% offtake share as of the last week of August vs 12.5% as of July 2). We reiterate our Outperform rating on PM, our top stock pick, driven by PM's pricing power, strong global brands and incrementality of its reduced risk product (RRP) platform under the iqos umbrella, which we believe should create long term shareholder value and upside in the stock. Q3 Outlook Expect A -1% Decline in Combustible Cig Volumes - We also note comments by PM s CFO Jacek Olczak at a recent conference guiding to a -1% decline in total company cig/heatstick volumes in Q3 given ongoing pressures in Russia (lack of pricing), the Gulf Cooperation Council (GCC) (prices basically doubled as a result of tax hike at end of June) & Indonesia (macro weakness). The company s guidance for FY17 volume remains unchanged at closer to down 3% for overall cig/heatstick volumes. USD 2016A 2017E 2018E EPS Curr. Prior Curr. Prior Q1 (Mar.) $0.98 $0.98 A NC NE Q2 (June) A NC NE Q3 (Sep.) NC NE Q4 (Dec.) NC NE FY $4.48 $4.85 NC $5.50 NC CY $4.48 $4.85 $5.50 FY P/EPS 26.1x 24.1x 21.3x Rev.(MM) $26,685 $28,343 $31,034 Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters NA = Not Available, NC = No Change, NE = No Estimate, NM = Not Meaningful V = Volatile, = Company is on the Priority Stock List Ticker Price Target/Prior: PM $140/NC Price (09/08/2017) $ Week Range: $ Shares Outstanding: (MM) 1,554.0 Market Cap.: (MM) $181,911.0 S&P 500: 2, Avg. Daily Vol.: 3,216,530 Dividend/Yield: $3.50/3.0% LT Debt: (MM) $26,595.0 LT Debt/Total Cap.: 139.4% ROE: NM 3-5 Yr. Est. Growth Rate: 12.0% CY 2017 Est. P/EPS-to-Growth: 2.0x Last Reporting Date: 07/20/2017 NC = No Change Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters Bonnie Herzog Senior Analyst bonnie.he rzog@ we llsfargo.com Patty Kanada, CFA Associate Analyst patty.kanada@ we llsfargo.com Adam Scott Associate Analyst adam.scott@ we llsfargo.com Please see page 3 for rating definitions, important disclosures and required analyst certifications. All estimates/forecasts are as of 09/08/17 unless otherwise stated. 09/08/17 18:21:08 ET Wells Fargo Securities, LLC does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report and investors should consider this report as only a single factor in making their investment decision.

2 Price Target Price Target: $140 from NC Our $140 price target is based on a 17.5x forward EV/EBITDA multiple and a 25.4x forward P/E multiple, both slightly above its avg. historical multiples. Risks include f/x headwinds and a broad-based pullback in consumer spending. Investment Thesis We expect PM to outperform over the long term given: (1) iqos, (2) a re-invigorated Marlboro brand franchise, (3) an industry-leading, diverse brand portfolio, and (4) an improving ROIC & economic profit. PM has emerged in a class of its own and we believe it is poised for further growth. Company Description Philip Morris International is engaged in the manufacturing and marketing of cigarettes and other tobacco products outside of the United States. Headquartered in New York, the company has a wide range of premium, mid-price, and low-price brands, and its portfolio consists of both international and local brands. Philip Morris' leading brand Marlboro is the world's best-selling international cigarette. Philip Morris is also the leader in reduced risk products (RRPs) with its iqos platform. 2 Wells Fargo Securities, LLC

3 Required Disclosures Additional Information Available Upon Request I certify that: 1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed; and 2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report. A member of Research Management currently has a long position in the securities of. Wells Fargo Securities, LLC maintains a market in the common stock of. Wells Fargo Securities, LLC and/or its affiliates, have beneficial ownership of 0.5% or more of any class of the common stock of. Wells Fargo Securities, LLC or its affiliates has a significant financial interest in. Wells Fargo Securities, LLC 3

4 PM: Risks include f/x headwinds and a broad-based pullback in consumer spending. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm, which includes, but is not limited to investment banking revenue. STOCK RATING 1=Outperform: The stock appears attractively valued, and we believe the stock's total return will exceed that of the market over the next 12 months. BUY 2=Market Perform: The stock appears appropriately valued, and we believe the stock's total return will be in line with the market over the next 12 months. HOLD 3=Underperform: The stock appears overvalued, and we believe the stock's total return will be below the market over the next 12 months. SELL SECTOR RATING O=Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. M=Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. U=Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. VOLATILITY RATING V = A stock is defined as volatile if the stock price has fluctuated by +/-20% or greater in at least 8 of the past 24 months or if the analyst expects significant volatility. All IPO stocks are automatically rated volatile within the first 24 months of trading. As of: September 8, % of companies covered by Wells Fargo Securities, LLC Equity Research are rated Outperform. 55% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Market Perform. 2% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Underperform. services for 46% of its Outperform-rated services for 33% of its Market Perform-rated services for 26% of its Underperform-rated Important Disclosure for International Clients EEA The securities and related financial instruments described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ( WFSIL ). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 ( the Act ), the content of this report has been approved by WFSIL a regulated person under the Act. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. Australia Wells Fargo Securities, LLC is exempt from the requirements to hold an Australian financial services license in respect of the financial services it provides to wholesale clients in Australia. Wells Fargo Securities, LLC is regulated under U.S. laws which differ from Australian laws. Any offer or documentation provided to Australian recipients by Wells Fargo Securities, LLC in the course of providing the financial services will be prepared in accordance with the laws of the United States and not Australian laws. Canada This report is distributed in Canada by Wells Fargo Securities Canada, Ltd., a registered investment dealer in Canada and member of the Investment Industry Regulatory Organization of Canada (IIROC) and Canadian Investor Protection Fund (CIPF). Wells Fargo Securities, LLC s research analysts may participate in company events such as site visits but are generally prohibited from accepting payment or reimbursement by the subject companies for associated expenses unless pre-authorized by members of Research Management. Hong Kong This report is issued and distributed in Hong Kong by Wells Fargo Securities Asia Limited ( WFSAL ), a Hong Kong incorporated investment firm licensed and regulated by the Securities and Futures Commission of Hong Kong ( the SFC ) to carry on types 1, 4, 6 and 9 regulated activities (as defined in the Securities and Futures Ordinance (Cap. 571 of The Laws of Hong Kong), the SFO ). This report is not intended for, and should not be relied on by, any person other than professional investors (as defined in the SFO). Any securities and related financial instruments described herein are not intended for sale, nor will be sold, to any person other than professional investors (as defined in the SFO). The author or authors of this report is or are not licensed by the SFC. Professional investors who receive this report should direct any queries regarding its contents to Mark Jones at WFSAL ( wfsalresearch@wellsfargo.com ). 4 Wells Fargo Securities, LLC

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